Tax Planning

Tax Planning Checklist #

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Contributing Pre-Tax Retirement Contributions #

The best way to reduce your taxable income is by maxing out your pretax retirement contributions. Contributions to pre-tax retirement accounts, such as 401(k) plans, 403(b) plans, and 457 plans, are made with income that has not been taxed. Contributions to pre-tax accounts grow tax-deferred. You will be required to pay ordinary income tax on distributions from these accounts in retirement.

Increase retirement contributions

In addition to pre-tax contributions, check if you have an after-tax provision in your 401(k). If yes, then you can contribute after tax money to your 401(k) and roll over the contributions immediately into a Roth IRA or Roth 401(k). Check your 401(k) plan for this option specifically.

Health Savings Account (HSA) #

HSAs (health savings accounts) are triple tax advantaged. The contributions are:

  1. 1.Exempt from tax
  2. 2.The account grows tax deferred and
  3. 3.You receive tax-free distributions when used for medical purposes.

To be eligible for HSAs, you must participate in a high-deductible health plan (HDHP). The maximum allowed contributions can be found on the IRS website. Since money in an HSA account remains yours and contributions reduce taxable income, maximizing contributions is a smart tax planning move. Fund HSA via payroll by Dec 31st. Non payroll deadline is by April 15th.

Real Estate #

If you sell your home, and it has been your primary residence for two of the last five years, single filers can exclude gains up to $250,000 and joint filers up to $500,000. So, it is very important to keep detailed records to support your tax basis in the home. This would include purchase documents, detailed listing of capital improvements (and receipts) as well as all selling expenses.

Contribute to 529 Plans #

Consider funding 529 plans for high school and college savings. This is a great resource for 529 Plans from every state. They provide plan information and tools that help you compare overall effectiveness of the many plans available to you.

Changes in Tax Law – Increase in Taxes? #

While no one can predict the future, many believe that tax rates will be increasing next year. If we do see an increase in tax rates for next year, consider accelerating income into this year and deferring deductions to next year.

Charitable Gifts #

  • Fund gifts with appreciated securities or a QCD (if permitted), for tax efficiency.
  • Use bunching techniques if your itemized deductions tend to fall below the standard deduction.

Flexible Spending Account (FSA) #

The advantage of FSA is that the payroll deductions avoid both income and Social Security taxes If you participate in the healthcare Flexible Spending Account (FSA), make sure you spend all the funds in your account by December 31.

Commuter account #

You can set aside the monthly cost of your commute before taxes in a Commuter benefit account. Besides transit, Commuter benefits can be used for parking and public transportation. Per IRS regulations, your employer can’t refund your unused commuter benefits funds back to you. However, you can submit claims for eligible expenses incurred during employment for up to 90 days.

Tax Loss Harvesting #

While the goal of investing should not be to lose money; sometimes we make bets which do not seem to pay off. In such cases; it might be advisable to sell the securities and book the loss. You can deploy the capital immediately to buy other securities which are not substantially identical or wait at least 31 days before buying back the same security. Just ensure you do not run afoul of the Wash Sale rule. Also you can’t sell a security in taxable account and buy an identical one in tax deferred and vice versa. The Wash Sale rule applies across ALL accounts.

The advantage of the Tax Loss Harvesting is that you are allowed to deduct $3,000 a year in capital loss deductions. The unused losses are carried over into the following years till exhausted.

The “substantially identical” text is vague and not been clarified. So technically you could sell the Vanguard Total World fund and buy the Vanguard US index fund and still claim losses.

Standard or Itemized Deduction #

The Tax Cut Jobs Act (TCJA) made a number of significant changes which means you now need to decide if you file for Standard or Itemized deduction at the Federal level. The (TCJA) dramatically increased the standard deduction and eliminated or restricted many itemized deductions available under previous tax laws. The big deductions available are:

  • State and local taxes (SALT). State, personal property, and either income or sales taxes are still deductible. However the TCJA capped the total itemized deduction at $10,000.
  • Mortgage loan interest. For mortgages December 14, 2017, or earlier, interest will be deductible on up to $1,000,000 of debt (the old cap), even if refinanced after December 14, 2017. For mortgage loans taken out after December 15, 2017, the TCJA allows itemizing homeowners to deduct mortgage interest paid on up to $750,000 worth of principal.
  • Home equity loan interest. Home equity interest is no longer deductible unless the debt is used to buy, build, or substantially improve the taxpayer’s home secured to the loan. Before the TCJA, home equity loan interest was deductible for loans up to $100,000.
  • Medical expenses. Unreimbursed medical costs that exceed 10 percent of adjusted gross income are deductible. Pre-TCJA it was 7.5 percent of AGI.
  • Miscellaneous itemized deductions Tax preparation fees, moving expenses, unreimbursed employee expenses are all no longer deductible. Prior to the TJCA, you could deduct unreimbursed employee expenses as long as it exceeded 2% of your Adjusted Gross Income (AGI).
  • Charitable contributions. The TCJA raised the limit for charitable donations from 50% to 60% of AGI. As a result it is no longer beneficial to do charitable contributions. Since the government has effectively raised taxes by making it uneconomical to itemize; one can only hope that these extra taxes are used for charitable endeavors.

Planning for a Higher Tax Bracket #

  • Accelerate income and defer deductions – Sometimes, it might make sense to increase income depending on what is your tax bracket.
  • Harvest gains and defer losses – Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate.
  • Roth conversions – Consider converting Traditional IRAs to Roth IRAs, especially if you are either 1) in a low tax bracket and can pay the taxes now with other funds available or 2) have a large net operating loss that can offset the income that is triggered on a Roth conversion. You can also consider doing a Backdoor Roth IRA contribution depending on your income limits. Make sure you do not have any money in a tax-deferred IRA account.
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